1. Field of the Invention
The present invention relates, in general, to financial instruments and, more particularly, to a method of creating standardized spread instruments, a system of executing and clearing the underlying inter-exchange traded legs of such instruments with the applicable global exchanges and clearing parties, and an apparatus for implementing the methods and systems of the invention.
2. General Background of the Invention
Financial instruments such as stocks, bonds, currencies commodities and derivatives (e.g., futures and options instruments related to such instruments) are traded either on regulated exchanges or directly between trading parties on an over-the-counter (i.e., off-exchange) basis. Exchange-traded derivatives are standardized contracts (e.g. futures and options) that are bought and sold on organized futures exchanges located throughout the world. Unlike the over-the-counter markets, the exchanges provide regulatory protection and clearing services to its trading participants.
Trades executed through a global exchange are held on the books of a firm that is a “clearing” member of the exchange's clearing organization. If buyers or sellers are not themselves clearing members of an exchange, they transact through clearing brokers associated with clearing members of the exchange. When a buy and sell order of two clearing members for a derivative instrument (e.g., a futures or options instrument) is matched by an exchange, performance and satisfaction of the contract is no longer between the original buyer and seller instead, it is between the buyer and the exchange's clearing party, and between the seller and the exchange's clearing party. The exchange's clearing party guarantees performance of every contract to each of its clearing members thereby effectively eliminating the counterparty credit risk associated with over-the-counter trading.
Spread trading is buying one or more instruments and concurrently selling one or more instruments to profit (or to otherwise hedge against an open position) based on changes in the correlation of the instrument(s) to each other. Spread trades are derivative trades that profit (or conversely lose) from a directional move in one or more risk factors or instruments (referred to as the “first leg”) and an opposite directional move in another risk factor or instrument (referred to as the “second leg”). Inter-exchange spread trades have inherent execution risk. For example, prior to execution of the underlying legs on the separate global exchanges, there may be price slippage in one or both legs. A spread instrument allows a trader to gain exposure to the movement in a relationship between risk factors of financial instruments including, for example securities, indices, currencies and commodities, without having to separately purchase and/or sell the underlying legs of the trade.
In some prior art spread instruments and systems, legging risks exist. Particularly, a market maker or other person or entity may have to assume the risk that one or both of the underlying legs of the spread instrument will not execute. In a traditional spread scenario, a trader has to execute the first leg with one party at one exchange and then attempt to quickly execute the second leg with another party at another exchange. Even with sophisticated spread trading tools, traders may well incur price slippage while working the second leg.
Accordingly, it is an object of the present invention to provide a system, method and apparatus for creating and executing inter-exchange spread instruments, wherein there is little or no legging risk.
It is also an object of the present invention to provide a system, method and apparatus for creating and executing inter-exchange spread instruments, wherein the spread instruments are created in a manner wherein the buyer and seller of the instrument effectively agree upon the price of all underlying legs at the time the spread instrument is bought and sold (i.e., matched).
It is another object of the present invention to provide a system, method and apparatus for creating and executing inter-exchange spread instruments, wherein the underlying legs of the spread instrument automatically execute.
These and other objects and features of the present invention will become apparent in view of the present specification, drawings and claims.